All eyes on the EU, again.

The Eurozone is about to face its biggest test. 

Italy's short-term government bond yields are on pace for their biggest single-day gain in more than 15 years Tuesday as investors scramble to re-price risk linked to Europe's third-largest economy amid concerns that new elections could be fought on the country's membership of the single currency. 

Italy's benchmark 2-year government bond yields were marked 1.23% higher from yesterday's close in early Milan trading, the biggest single-day gain since 1992, and changing hands at 2.27% by mid-morning. Benchmark 10-year bonds were quoted 45 basis points higher from yesterday at 3.13%, well past the mark that Morgan Stanley warned would ignite contagion amongst the domestic Italian banks that hold them and 3.14% higher than triple-A rated German bunds.

"Italy knows the rules. They might want to read them again," said European Central Bank Vice President Vitor Constancio in an interview published by German's Spiegel magazine, a comment that may dampen speculation of a near-term intervention from the central bank. 

The moves followed a decision by Italy's Prime Minister-designate, Giuseppe Conte, to abandon plans to form a government after President Sergio Mattarella refused to accept the appointment of Paolo Savona, an 82-year old economist and vocal anti-euro critic, to the post of finance minister. Mattarella will now attempt to form a "technocratic" government this week, led by a former International Monetary Fund official Carlo Cottarelli, but that is unlikely to survive a confidence vote in parliament, meaning Italy will likely return to the polls in the fall to elect a new leadership that could seek an exit from the single currency.

"The uncertainty over our position has alarmed investors and savers both in Italy and abroad," Mattarella said Monday. "Membership of the euro is a fundamental choice. If we want to discuss it, then we should do so in a serious fashion."

The euro fell 0.8% against the U.S. dollar, on track for its biggest fall since early March to trade at 1.1550 by mid-morning in London.

With both the Five Star Movement (M5S) and Lega parties holding a majority in both houses of Italy's parliament, Mattarella's technocratic government won't likely survive a confidence vote, meaning Italy will face new elections in the autumn - a vote which could be a de-facto referendum on Italy's membership in the single currency. 

Deutsche Bank (DB - Get Report)  shares were marked 3.77% lower in Frankfurt, with investors marking the stock down based on, at least in part, data from its 2017 annual report that showed Italian bonds represent a third of its net €3.1 billion in sovereign debt exposure, while French banks such as BNP Paribas SA (BNPQY)  (-3.66%) and Credit Agricole SA (CRARY)  (-3.21%) hold around €19.2 billion and €10.6 billion, respectively, on their balance sheets.

The Stoxx Europe 600 index fell 1.5% to 383.97 points in the opening hour of trading trading as investors piled into safe-have assets, taking the yield on 10-year German bunds to 0.20% and pushing the euro past a six month low of 1.1541 against the greenback.

Bank stocks led the decline in broader European trading as well as in Italy, with the Stoxx 600 Banks index falling 3.3% to its lowest level since February 2017. Germany's two biggest lenders, Deutsche Bank AG (DB - Get Report) and Commerzbank AG (CRZBY) , fell 3.77% and 4.57% respectively in the opening 45 minutes of trading while Italy's Intesa Sanpaolo (ISNPY) slumped 5.19%, UniCredit SpA (UNCRY) slid 5.02%. Spain's Banco Santander (SAN) was marked 5.09% lower by late-morning in Frankfurt.